Prepping Economics Part 4 : The Unavoidable Need for Money
This is the fourth of our six part series about prepping economics. An index listing the other sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the beginning and then working your way through the articles in sequence.
So far in this series, we have discussed how US currency is unlikely to be accepted in commerce during a Level 2 or 3 situation. We then moved forward to consider the suitability of barter an alternate way to support the necessary buying, selling, and trading of goods and services in whatever communities of surviving people you can interact with.
Bartering has some benefits, but is replete with many challenges and limitations. Because of this, it seems inevitable that any community will evolve past simple bartering to more sophisticated bartering where not only goods and services are exchanged, but abstracted forms of these start to be accepted as well – IOU notes, if you will.
Soon the IOU notes will start to be traded without actually being cashed in. Perhaps you first wrote an IOU for ten dozen eggs to Mr A. Mr A is then buying some meat from Mr B, and says ‘I’ll give you this IOU for ten dozen eggs’ in payment for your meat.
Mr B does not come and ask for his eggs. Instead, he passes the IOU on to Mr C when he buys butter from Mr C, and of course you hope that eventually the IOU will end up lost or so damaged as to be destroyed, so that you never need to make good on your original promise!
These IOUs are not without problems. For example, if you write out an IOU for ten dozen eggs, how can the holder of that note then split it, giving an entitlement to six dozen eggs to one person and four dozen eggs to another, and so on.
Furthermore, while it is good, from your perspective, that you avoided having to pay the ten dozen eggs on the spot, you now have the obligation to deliver ten dozen eggs to someone hanging over your head. Sooner or later, someone is going to appear and ask for the eggs. Does that mean you now have to keep ten dozen eggs set aside at all times just in case someone arrives, asking for them?
Eventually these IOUs for all sorts of different things will be superseded by a different form of IOU – what we would consider to be money.
Please now read on for how we see this evolution of money as continuing.
The Simplest Form of Money
If we track the evolution of currency in earlier civilizations, we can see a common process that seems to consistently occur. It seems very likely to expect a similar evolution as we attempt to rebuild from some sort of disaster and the social collapse that occurred.
Money started off as being some thing of value which was then used as a ‘medium of exchange’ as well as for its primary purpose. This is termed ‘commodity money’.
This thing of value is something which is clearly understood and accepted in the community as being valuable, and it presents as a reasonable solution to most of the limitations of barter. It is something that can be stored for an extended time, it is something that is sub-dividable, it is something that is easy to transport, and it has a clear value that people can agree on, and is readily bought and sold.
Maybe it might be decided that your community’s currency will be in the form of sacks of grain. This would not score high marks for transportability, but it does reasonably well on most other headings, and as for the transportability, before too long, some clever person will say ‘Hey, Joe, you don’t need to come clear in to town to buy grain, then take it all the way home to store, then bring it all the way back in to town to buy things at the market. I’ll store it for you, and you can just give people notes authorizing me to hand over shares of your grain to them.
All of a sudden, you’ve got the community’s first new style bank, and you’ve got the bank also allowing you to ‘write checks’ on your account. And when the banker realizes that people never need all their grain at one time, and that he can therefore issues IOUs to people for grain that he doesn’t actually have, your bank will have started creating/lending money, too.
Gold has historically been an excellent form of commodity money because it addresses all the problems with barter. It is easily transported, stored, and sub-divided, and has an underlying value in and of itself (at least in normal and historic times).
An Evolutionary Step
The next step beyond commodity money is representational money – the IOUs and checks that we have been talking about, and then becoming more sophisticated into a more generic form of underlying value.
This is where a banknote (for example) is issued that can be exchanged for the underlying commodity. The banknote might say ‘this is worth an ounce of gold’ or it might say ‘this is worth a dollar’ and the value of gold in dollars would be fixed, making it the same as the note simply saying what weight of gold it was the same as.
Representational money can be even more convenient to store and transport and subdivide than commodity money. It can be used alongside commodity money – ideally there’d be no major difference between getting an ounce of gold and a note that was worth an ounce of gold, and indeed, this is what happened in historic times, when there might be simultaneously coins that were commodity money (ie the value of the coin was reflected in the value of the metal that was used to make the coin) and representational money in the form of banknotes.
A problem with representational money is that it is susceptible to being counterfeited. Commodity money can not be readily counterfeited, because the value of the money is the same as the value of the thing which is being used as money. Commodity money can be slightly cheated on by reducing the weight or measure or quality of the commodity, and these types of considerations impact on what types of products are suitable to be used as commodity money. However, other than small fractions shaved off, or quality issues, commodity money is self-referential and establishes its own validity and value.
But representational money usually has little or no underlying value in and of itself – its value is its promise that it can be converted to the thing it represents. This means that if it can be duplicated – ie, forged, there is a potential problem that needs to be countered by making the representational form as difficult to copy as possible.
The key thing about commodity money and representational money is that it is difficult for a person to spend money they don’t have. In theory, a bank or government should not issue bank notes worth a greater amount of gold than the gold they had in their vault.
In practice, of course the banks and/or governments would typically issue more, gambling that it would never happen that everyone would want to convert their banknotes into actual gold at the same time. But, even after allowing for that, there are practical constraints on how much representational money could be fairly and responsibly introduced into circulation.
Hyper-inflation would never be possible with representational currency. On the other hand, some economists argue that deficit spending (ie spending money you don’t have and which doesn’t otherwise exist) is the best way to stimulate an economy, even though this will probably involve the creation of inflation as a result. Which brings us to the next step :
The Ultimate Form of Currency?
It has been common for governments, for either good or bad reasons, to seek to free themselves of the limits on how much money they can create that are imposed on them by representational money’s need to be linked to an appropriate supply of the thing the money represents and can be converted into.
So governments switch to issuing fiat money, where money is worth whatever the government says it is, but the government doesn’t undertake to convert the notes into a specific thing of value on any basis at all.
Fiat currencies are only as stable as the governments that support them, and as part of the government’s attempts to strengthen the essentially weak currency, they will commonly attempt to limit or restrict the ability of their citizens to use alternative forms of representational currency; indeed, the US itself has an ongoing history of cities and private individuals attempting to create alternative forms of currency, and of the federal government attempting to prevent such measures.
At this point, if you’ve not yet read the first two articles in this series, it might make sense to do so.
Implications for Preppers
It seems economically inevitable that social groupings will agree upon – either formally or informally – some type of commodity currency as they evolve to address the limitations of simple bartering. It is possible that different communities will adopt different commodities as their monetary unit.
A community with most of its economic activity being in the form of potato growing might choose pounds of potatoes as a measure (not a good measure, by the way, because how do you adjust for the quality of the potatoes). Another community might be wheat based, and so on.
There’s no easy way to prepare for this step in your community’s economic evolution, other than to be a positive agent of change to encourage the adoption of commodity currencies and to help the commodity evolve from being actual goods and services to things of more abstract value such as gold and silver, which you may already have a supply of.
There is clearly an opportunity for some people in the community to start providing banking services, and if you are a respected member of the community, maybe that could be you.
Article Series Continues….
This was the fourth part of our six part series on prepper economics. Please do read on through the balance of the series :
Part 0 : Introduction – Why Economics is Practical and Important to Preppers
Part 1 : International Reasons Why the Dollar Will Fail
Part 2 : Domestic Reasons Why the Dollar Will Fail
Part 3 : Why Bartering Is Not A Useful Way of Trading
Part 4 : The Unavoidable Need for Money
Part 5 : A Probable Currency Evolution Post TEOTWAWKI
Part 6 : How to Prepare for the Future Economy